All Aviation Articles By Greg Reigel

Insurance Will Not Cover An Unqualified Pilot

If you buy insurance to cover the aircraft you own or fly, you want to make sure the policy covers you and your aircraft if you ever have a problem. It is important to understand that your insurance policy is a contract between you and your insurer. That contract has terms and conditions that spell out the rights and responsibilities of both you the aircraft owner and/or pilot and the insurer.No Insurance Unqualified Pilot

As you may be aware, if an aircraft owner and/or pilot does not comply with the requirements of the insurance contract, the insurer can deny coverage. This can sometimes lead to arguments between the insurance company and the insured aircraft owner or pilot.

This was the situation in one recent case in which the insurance company denied coverage to an aircraft owner whose aircraft was destroyed during an emergency landing. In Hund v. Nat'l Union Fire Ins. Co. of Pittsburgh (D. Kan., 2019), the aircraft owner was flying his aircraft along with another pilot. During the flight the aircraft’s engine experienced a loss of power and the other pilot—who was piloting the plane at the time—told the aircraft owner "your airplane," at which point the aircraft owner assumed the role of pilot in command and attempted to restart the engine. Unfortunately, the aircraft owner was unable to restart the engine and was forced to perform the emergency landing that resulted in the destruction of the aircraft. After the accident, the aircraft owner submitted a claim to his insurer for the value of his aircraft.

In determining whether to pay the claim, the insurer looked to the insurance policy which addressed coverage for both the aircraft owner as a named insured, and for other pilots operating the aircraft. The policy conditioned coverage on compliance with the policy's “Pilots Endorsement” which required, unsurprisingly, that the pilot in command have a valid FAA pilot certificate, a current and valid FAA medical certificate, if required, and a current and valid flight review.

Unfortunately, neither the aircraft owner nor the other pilot satisfied these conditions: The aircraft owner possessed a current flight review, but not a current medical certificate; the other pilot did not have a current flight review. Although these facts were undisputed, the aircraft owner argued that 14 C.F.R. § 91.3(b) suspended the policy requirements during an in-flight emergency, which he and the other pilot faced during the emergency landing.

14 C.F.R. § 91.3(b) provides that "[i]n an in-flight emergency requiring immediate action, the pilot in command may deviate from any rule of this part to the extent required to meet that emergency." Specifically, the aircraft owner argued that § 91.3(b)'s emergency rule was in effect when he assumed control from the other pilot, and the emergency rules "suspended all other rules" except to do what is necessary to respond to the emergency. The insurer didn’t agree, and neither did the Court when the aircraft owner sued his insurer for denying his claim.

The Court initially observed that Section 91.3(b) allows a pilot in command to "deviate from any rule of this part to the extent required to meet that emergency." It then concluded that Section 91.3(b) applied only to the rules in Part 91, and not the regulations governing pilot qualifications in 14 C.F.R. Part 61.

Makes sense to me. Certainly, the aircraft owner’s argument was creative. But I agree that the plain language of the insurance policy and the regulations are inconsistent with that argument.

The moral of the story? If you are going to act as pilot in command, make sure you satisfy both the applicable regulations, as well as the requirements of any insurance policy covering the aircraft you are flying.

Arguing Aggravating And Mitigating Circumstances In Civil Penalty Cases

When the FAA assesses a civil penalty for regulatory violations, it is required to take into account both aggravating and mitigating circumstances when it calculates the penalty. Typically the FAA focuses on aggravating circumstances to support assessment of a higher civil penalty. On the other hand, respondents argue that mitigating circumstances are present that justify a lower civil penalty. But if the case ends up going to hearing, it then becomes the administrative law judge's ("ALJ") responsibility to decide (1) whether any aggravating or mitigating circumstances are present, and (2) how/whether those circumstances may impact the civil penalty assessed by the FAA.FAA

As an initial matter, the FAA has the burden of justifying the amount of the civil penalty. The ALJ must then look at the totality of the circumstances surrounding the violation to determine whether the civil penalty is sufficient to serve as a deterrent to both the respondent and the industry as a whole. As guidance, the ALJ may consider the following factors the FAA is supposed to consider per FAA Order 2150.3C FAA Compliance and Enforcement Program:

  • The nature of the violation;

  • Whether the violation was inadvertent or not deliberate. This is typically a mitigating factor, and the absence of inadvertence isn't automatically an aggravating factor;

  • If the respondent is a certificate holder, the certificate holder's level of experience;

  • The attitude or "compliance disposition" of the respondent;

  • The degree of hazard posed by the violation;

  • Any action taken by an employer or other authority;

  • The respondent's use of a certificate;

  • The respondent's violation history, if any. This is only an aggravating factor. A violation-free history is expected and is not a mitigating factor;

  • Decisional law;

  • The respondent's financial ability to absorb a sanction;

  • Consistency of sanction;

  • Whether the respondent reported the violation voluntarily; and

  • What, if any, corrective action the respondent may have taken as a result of the violation.

If you are facing a proposed civil penalty or appealing an assessed civil penalty, you should definitely determine whether any of the circumstances of your situation support any of these mitigating factors and then argue those facts to the FAA or ALJ to try and reduce the civil penalty. You can find read a good example of how this works in a recent case - In re Star Helicopters.

On the other hand, if any of your circumstances could be characterized as aggravating factors, you will also want to identify those facts, because you know the FAA will. You can then determine how best to argue against and minimize the impact those aggravating circumstances may have on the civil penalty.

What Is Compensation According To The FAA?

FAA’s policy regarding “compensationPilots and aircraft operators frequently misunderstand the FAA’s policy regarding “compensation” in the context of the Federal Aviation Regulations (FARs). And this concept appears frequently in the FARs.

For example, under 14 C.F.R. 61.113(a), a private pilot may not carry persons or property for compensation or hire, or act as pilot in command for compensation or hire. Additionally, if a flight or operation is conducted for compensation or hire, that flight or operation may be subject to operational requirements and/or limitations under 14 C.F.R. Parts 91, 135 or 121. Such a flight or operation may also have additional medical certification prohibitions or requirements.

So, what then is “compensation” according to the FAA?

The FAA’s longstanding policy and perspective views “compensation” very broadly. Compensation isn’t just the exchange of cash. Rather, it can be receipt of anything of value that is conditioned upon or in exchange for operation of the aircraft. And the exchange of value does not require a profit or profit motive. A beneficial economic relationship will qualify as compensation.

According to the FAA, compensation may include, but is not limited to:

  • Reimbursement of expenses (e.g. fuel, oil, transportation, airport expenditures, aircraft rental fees, lodging, costs of ownership etc.);

  • A free meal;

  • Logging of flight time when the pilot does not have to pay for the costs of operating the aircraft;

  • Salary or wages; and

  • Goodwill in the form of expected future economic benefit.

While some of these items can readily be understood to be compensation, the FAA determines whether an operator is receiving something of value in exchange for operating an aircraft on a case-by-case basis and its decision will depend greatly on the purpose and objective of the flight or operation.

So, pilots and operators need to analyze their flights and operations to determine whether they are, in fact, receiving compensation for those flights and operations and, if so, what impact that compensation may have on whether such flights and operations comply with the regulations. Failure to comply could subject the pilots and/or operator to legal enforcement action that could result in suspension or revocation of airman certificates or a civil penalty.

Tips For Renting Your Aircraft

If you own an aircraft and are not utilizing it as much as you would like or if you would like to try and recover some of the cost of owning the aircraft, you may have thought about renting your aircraft to other pilots. As a practical matter, that makes some sense. But before you actually rent your aircraft to another pilot, here are a few things you should consider.

Aircraft Owners May Rent Their Aircraft To Third Parties

Tips for Renting your aircraftIt is important to understand that the FAA does not prohibit aircraft owners from renting their aircraft. In fact, the regulations specifically contemplate rental arrangements. So, renting your aircraft is permitted, provided that you comply with applicable regulations. The FAA provides guidance on what is and isn't a permissible rental arrangement in Advisory Circular 91-37B Truth in Leasing (although truth in leasing requirements only apply to large civil aircraft, the general lease concepts discussed in the AC apply to leasing arrangements for all aircraft).

Make Sure Your Insurance Permits Aircraft Rental

Most aircraft insurance policies will extend coverage to other pilots who fly your aircraft provided that the pilots are either expressly identified in your policy or if they have the necessary experience/qualifications to meet the "open pilot" clause of the policy. However, if you are going to charge the pilot for use of your aircraft, you need to confirm that your policy allows you to rent or lease your aircraft to a third-party. Most aircraft policies issued to owners for personal/business flying do allow aircraft leasing, but it is important to confirm this with your insurance underwriter.

Also, rather than paying to obtain their own insurance policy or renter's insurance to cover their use of your aircraft, most renter pilots will want to be named as an additional insured under your policy as this can oftentimes be done at no cost to you or the renter pilot. In that case, renters will typically ask for a certificate of insurance that reflects not only that they are added to your policy, but that they are covered for their operation and use of their aircraft. This is important because it doesn't do the renter pilot any good if he or she is added to the owner's policy but only covered for the owner's operation of the aircraft, rather than his or her own use.

Renting Your Aircraft Can Trigger Tax Consequences

In most states, when an aircraft owner rents an aircraft to a third-party the owner is required to collect and remit sales tax on the rent paid by the third-party for the aircraft. If you are in one of those states, in order to rent your aircraft you will need to obtain a sales tax number so you can collect and remit sales tax to the taxing authority. This is the aircraft owner's obligation and the taxing authority will hold the aircraft owner responsible for any sales tax the taxing authority believes the aircraft owner should have collected and remitted, regardless of whether the renter pilot actually paid the sales tax to the aircraft owner.

Also, when you rent your aircraft many taxing authorities view that activity as commercial activity which then means your aircraft could be subject to assessment of personal property tax on the value of the aircraft, or some portion of the value based upon the pro-rata rental versus personal use of the aircraft. Although not all states assess personal property tax on aircraft, if you are in a state that does you will want to determine your potential property tax exposure before you decide to rent your aircraft.

Conclusion

Although you will also have other things to consider as you decide whether to rent your aircraft to other pilots, these three issues should be near the top of your list. And if you understand and address these issues up front that will help ensure a successful aircraft rental experience for both you, the aircraft owner, and your renter pilot.

Greg can be reached at:

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  greigel@shackelford.law
Website:  www.shackelford.law

Closing Aircraft Purchase/Sale Transactions

 

Aircraft Purchase/Sale Transactions

As we get to the end of the year, many aircraft purchasers and sellers are trying to get their deals closed. Whether for tax or other reasons, year end is a busy time for aircraft transactions. Many transactions are closed using escrow agents located in Oklahoma City, Oklahoma (home of the FAA Aircraft Registry). If you have never been involved in an aircraft transaction, you may wonder what happens at an aircraft closing.

In a typical (if such a thing exists) aircraft closing, here are the steps an escrow agent takes to help aircraft sellers and purchasers close a transaction once all of the necessary funds and documents are in escrow:

  • The escrow agent will pay off any liens, mortgages, security interests or other interests held by third parties against the aircraft ("Liens");

  • The escrow agent will disburse to the seller the purchase price, plus any unpaid amounts due from purchaser to seller for flight costs associated with moving the aircraft to the inspection facility or the delivery location, and less one-half of the escrow agent's fee;

  • Once the seller confirms receipt of the funds, the escrow agent (a) dates and files with the FAA releases of any Liens the FAA Aircraft Bill of Sale (FAA Form 8050-2), the Aircraft Registration Application (FAA Form 8050-1) and statement in support (for example, if the purchaser is a limited liability company); and (b) dates and releases the Warranty Bill of Sale and Assignment of Warranties and Other Rights (if applicable) out of escrow to purchaser;

  • Purchaser executes and delivers the delivery receipt to the seller which confirms the aircraft is in the delivery condition and is accepted by the purchaser;

  • If the aircraft is subject to the Capetown Convention, the escrow agent, as purchaser’s professional user entity, registers the sale of the aircraft to the purchaser with the International Registry; and

  • The escrow agent, as the seller’s professional user entity, discharges any registration by seller with the International Registry of any international interest or prospective international interest registered with respect to the aircraft, and consents to the registration of the sale of the aircraft to the purchaser.

The seller and purchaser usually intend that each of these actions is interdependent with each of the others, but that upon completion they are considered to have occurred simultaneously. When all of these steps are completed, the seller delivers physical possession of the aircraft to the purchaser at the closing location.

This closing process may occur via a telephone call with all of the interested parties on the line, or simply after each of the interested parties has provided authorization (usually via e-mail) for the escrow agent to perform these steps and close the transaction. And, of course, depending upon the transaction, these steps may vary. But this is generally how the process occurs.

If you ever have questions or need assistance with an aircraft transaction or closing, I would be happy to help. And in the meantime, Happy New Year.

Greg can be reached at:

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  greigel@shackelford.law
Website:  www.shackelford.law

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